Tuesday, January 5, 2016

Some decent news about South Dakota's economy in 2015 got the new year off to an encouraging start. This morning's Rapid City Journal reports that "the state's economy is strong, unemployment drops, and tax revenues rise." Recalling last year's bruising ballot battle over a minimum wage increase in South Dakota, supporters of the measure, me included, have to feel pretty good about how things shook out after we won at the polls and the new minimum wage took effect on January 1, 2015, a year that ended with an economic flourish. The unemployment rate, at 3.0%, fell to its lowest level since before the 2008 recession, with total employment rising to above pre-recession levels. Meantime, sales and use taxes rose a bit over 4%, nearly a full percent higher than expectations. These numbers didn't come as much of a surprise to me because in our consumer driven society,

Three Reasons?Wrong, Wrong, and Wrong(photo from sdra.org)

it just follows that higher wages will drive more purchases, which in turn stimulates the economy. Using an analysis from the South Dakota Budget and Policy Institute, which showed that 80,000 South Dakota wage earners would get an immediate $1.25 an hour raise, it was fairly easy to conclude that the extra couple of hundred bucks a month of purchasing power for all those folks would add $15 million a month to South Dakota consumer spending. Based on that, I was mystified as to why Governor Daugaard opposed the minimum wage hike. He famously said, "this issue should be based on economics, not politics. There needs to be an analysis of how many jobs would be lost." It seemed pretty clear to me that the economic argument favored a wage hike, and of course as it turned out, not only were no jobs lost, but there was a net increase in new jobs over the year. Why Daugaard couldn't understand that is probably more of a reflection of his political tilt than a bow to common economic sense, the very mindset that he was opposed to. The economic argument was compelling, the political one self-serving. My guess is that Daugaard was swayed by the siren song of the South Dakota Retailers Association (of which I'm a member in good standing) which forecast ominous results stemming from a minimum wage increase. SDRA fought the issue with everything it had, even sending a spokesman from Pierre to Rapid City to weigh in against the measure at a public forum. SDRA blanketed the state with an ad campaignthat predicted a higher minimum wage would "trigger higher prices, layoffs, cuts in hours for workers, and delays in making needed improvements." No doubt there were some spot instances where some or all of those eventualities occurred, but its clear from year end summaries that South Dakota's economy moved forward nicely in the aggregate. The opposition to

Wages Going Up In SDThe Up-Arrow Applies To The Economy Too(graphic from waow.com)

the wage hike had it all wrong. Did the wage hike by itself trigger the nice little boomlet South Dakota's economy had in 2015? You could argue that there were several, maybe many factors that made it happen. My view is that the surge in spending power by wage earners had to play a significant role. If there's a conclusion to be derived here, it's that finding ways to increase wages in South Dakota certainly doesn't lend itself to the economic woes that opponents of higher wages predict. As our agricultural community knows well enough, money is like manure. It doesn't do any good unless you spread it around.

Let's never forget that Henry Ford specifically raised wages for his factory workers (from $2.35 a day to $5.00 a day back in 1914), partly to cut down on turnover, partly to keep unions out, but also to ensure a steady market for the thing that the factory workers were making: automobiles. His factory workers could afford to buy what they made, which only helped the economy.

Eve, Ford also pushed for the two-day weekend so that workers (with their pockets full of wages) had time to go out and spend that money. Accumulation of wealth was not the goal; using wealth to have a better life (through buying nicer things) was the goal.

Trickle down economics don't work unless you tax wealth to make it trickle down. This bottom up economics does work and helps all in the economy. It was good that South Dakota could do this even with the slow down in to oil field of North Dakota.

A very silly comment, Mr. Tsitrian, and well below your normal high standards.

I supported a higher minimum wage also, because it was a largely inconsequential feel-good measure, with minor job losses (suffered, unfortunately, by low wage workers), probably more than offset by the modest benefits sustained by a few other low-wage workers. Nothing like 80,000 people benefitted, and you shouldn't rely on an advocacy organization for your statistics. A study by South Dakota's Business Research Bureau (done years ago in connection with another minimum wage proposal) suggested that an increase in the minimum wage would modestly benefit perhaps 20,000 South Dakota workers, at a cost of 200 or so South Dakota jobs. (These numbers are filtered through my foggy memory, but roughly accurate.) A decent tradeoff, but not transformative for the state's economy, and not much solace for the 200 workers thrown out of work by the "largess" of mandated higher wages.

I note that your blog appeared just as the Dow was declining 1,000 points or so. But correlation is not causation, so I don't hold you responsible. Likewise, it is downright foolish to claim that a minimum wage increase, which did indeed occur prior to a small improvement in the state's economy, actually caused that small improvement. It was a nice but nearly insignificant gesture by voters, little more.

And the increase, along with your hyperbolic attribution of benefits to it, may tempt us to take our eye off the ball: A better economy requires better jobs, and these in turn depend on meaningful changes. I'm talking about education, entrepreneurship, better utilization of the resources we have (such as the School of Mines), and better ways to finance South Dakota startups.

By the way, your theory of increased consumption owing to the higher minimum wage should be tempered by the fact that this is a zero-sum game. Every penny of benefit is offset by a penny of cost, sustained by employers. Would the employers have devoted these dollars to consumption? Probably not in the same proportion. Employers instead would have devoted some of these dollars to "investment," which in this case means, probably, local jobs and local business improvements. South Dakota needs that kind of investment, which has a multiplier effect.

Politicians will continue to believe they can repeal the law of gravity (or in this case, the laws of market economics), and historically they have been able to fool some of the people some of the time. Political magic tricks are entertaining and sometimes harmless, but they are no replacement for the careful thought and hard work that we need more of here in South Dakota.

Don, I think the facts support my conclusion "that finding ways to increase wages in South Dakota certainly doesn't lend itself to the economic woes that opponents of higher wages predict." The unexpectedly strong jump in SD sales tax revenues coincides with the increase in the minimum wage. I think the increase had something to do with that, prima facie, and invite you to show me and my readers that higher wages distributed to tens of thousands (you say 20k, I say 80k, either way a significant number) of South Dakotans didn't account for much of that. These are people who have a very high propensity to consume, which I'm sure they did, to the benefit of many businesses in South Dakota. Also, how do you divine that businesses that don't spend money on higher wages plow it back into the South Dakota economy? Are you saying there was a net loss to the economy in the amount of the wage increase? If so, I'd love to see the evidence.

About Me

I'm a businessman and writer living in the Black Hills of South Dakota. I've written articles and commentary for 25+ years. I was a member of the Chicago Board Options Exchange and the founder of a futures brokerage firm for a total of twenty years and I own commercial real estate in western South Dakota. I served three years ('66-'69) in the U.S. Marine Corps, including a 13-month tour of duty in Vietnam as a radioman. My wife and I have two grown daughters. We make our home in Rapid City, South Dakota